Banks'race to buy finance companies began last October when the State Bank of Viet Nam allowed the Housing Development Joint Stock Commercial Bank (HDBank) to buy out Societe Generale Viet Finance, one of the largest foreign-owned consumer finance companies in the country.— Photo DTCK

Compiled by Thien Ly

At shareholders' meetings this year many banks unveiled plans to acquire finance companies to take advantage of their retail business and boost lending.

The Sai Gon-Ha Noi Joint Stock Commercial Bank (SHB) is the latest to announce such plans. With the acquisition, SHB expects to achieve its goals of developing into a multi-functional retailer by 2015 and a strong financial group by 2020.

The finance company is expected to help SHB develop especially its consumer lending, a segment in which many foresee a boom in the near future.

VPBank has completed the formalities for buying the Vinacomin Finance Company, while the Petrovietnam Finance Corporation has already merged with Westernbank to become the Viet Nam Public Joint Stock Commercial Bank.

Economists agree that this is a good time for banks to acquire finance companies since many State-owned corporations have been ordered by the Government to pull out of all non-core businesses, including finance.

Banks'race to buy finance companies began last October when the State Bank of Viet Nam allowed the Housing Development Joint Stock Commercial Bank (HDBank) to buy out Societe Generale Viet Finance, one of the largest foreign-owned consumer finance companies in the country.

The transaction, the first of its kind, paved the way for others to make acquisitions, which will also eventually reduce the number of financial institutions, one of the targets of the banking sector reform announced by the central bank.

The race has heated up after the Prime Minister issued a decree on the operations of finance and financial leasing companies allowing them to issue bank guarantees and credit cards like a bank and issue certificates of deposits and bonds to raise funds.

Analysts say that the merger of banks and financial companies will be symbiotic and offers a natural synergy.

Banks can take advantage of finance companies' large retail-customer base while the latter can profit from the vast resources of the banks.

Finance companies can also act as underwriters for companies' issue of bonds, shares, and valuable papers, and with acquisitions bank can get a share of this pie.

Finance companies generate high profits since they lend smallish amounts to retail borrowers at high interest rates because they often do not require collateral from borrowers.

These conditions are ideal for middle- and low-income earners, who account for a majority of the population, to borrow.

HDBank, for instance, made a pre-tax profit of VND396 billion (US$18.8 million) last year, with its subsidiary, HDFinance, contributing VND79 billion.

But there is a dark side to this, analysts point out: high rates of bad debts.

According to figures from the central bank's HCM City office, last year the bad debts of finance companies and financial leasing companies stood at 21.96 per cent and 37.53 per cent.

Effect of dong devaluation

On June 18 the State Bank of Viet Nam decided to depreciate the dong against the US dollar by 1 per cent after the rate had been stable for around a year.

The dollar's rate is now fixed to 21,246 dong, up from 21,036 dong. Banks can trade the greenback within a 1 per cent band from the interbank rate, or between 21,034 and 21,458 dong.

The central bank said the adjustment would support economic development, help increase foreign exchange reserves, and improve the country's balance of payments.

But opinion is divided on the likely impacts.

According to HSBC, the devaluation of the dong should not lead to aggressive weakness in the currency.

It said it did not expect the small depreciation to cause concern though there is undoubtedly a risk that if policy is too loose, concerns about rising inflation and further depreciation could emerge.

The bank said further that the dong should be relatively stable over the coming year.

Analysts at the Vietcombank Securities Company said the adjustment was a measure to stabilise the market rather than to spark economic growth.

They too were sanguine that it would bring little inflationary pressure since the devaluation was just 1 per cent and aggregate demand remains weak.

But for domestic enterprises the depreciation is not very good news.

While foreign companies can easily pass on their higher costs due to the forex rate increase to buyers in major markets like the US, Europe, and Japan, local companies do not have that luxury since their customers are overwhelmingly domestic.

The devaluation is also said to have created pressure on banks' deposit interest rates.

Some banks in HCM City have been forced to launch promotions since they are afraid that people may withdraw their deposits to buy dollars or gold fearing more volatility.

Gold traders unprepared

The Ministry of Science and Technology (MoST)'s Circular 22, which took effect this month, regulates purity and other standards in the gold business. It stipulates that the standards of quality and measurement of gold jewellery traded in the market must be written as the product code with the correct gold content.

According to the circular, at least 75 per cent of 18-karat gold jewellery must be pure gold, while it is 99.9 per cent for 24-karat jewellery.

The media has complained frequently that due to the lack of oversight and control, most 18-karat jewellery has only 58-68 per cent gold.

Many gold traders in HCM City are still in the process of understanding its stipulations since Circular 22 has been in effect for less than a month.

According to the Sai Gon Jewelry Association (SJA), the city has around 3,000 businesses involved in the production and trading of jewellery, but only 10 per cent of them have full understanding of Circular 22 and made necessary preparations to fulfill its requirements.

A majority of small jewellery traders have done nothing to comply with the provisions of the circular. The biggest problem facing them is to remake jewellery to meet the new regulations, a very costly affair that could even ruin them.

Besides, some of the new regulations are said to be impractical or hard to comply with. For instance, the hallmarks on gold jewellery must be directly placed on the metal through mechanical engraving, laser engraving, embossing, or other methods, or on documents enclosed with the products.

Gold traders said that this requires a huge investment in equipment. They also said that there has been too little time between the issuance of the circular and its coming into force for them to make necessary preparations.

However, an official from the city Department of Science and Technology said jewellery traders were indeed given enough time to implement the new regulations, and any violations would be severely punished. — VNS

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